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Author: malcock001

There are many sound business reasons why you may have been watching ITV’s Love Island closely over the last few weeks.

For the Marketers out there, it’s a perfect opportunity to observe how “Millennials” interact with each other. For the Product people, it’s a chance to see a luxury villa in action. Of course it may be that you’re in Sales and you simply enjoy heavy petting. That’s the beauty of the show. It caters for everyone.

For me, a nightly trip to The Villa has been vital in making sense of some strange consumer spending data popping up over the last few weeks.

For instance, the British Retail Consortium released some vital statistics of the economic variety last week. The headlines showed consumer retail and leisure spending in May 2017 was broadly in line with last year. Look beyond the headline though and there is a seismic shift, with shoppers prioritising the purchase of leisure experiences over physical goods.

Fashion has been hit the hardest, with some of the UK’s biggest high street retailers such as Next and Marks & Spencer reporting very difficult trading conditions. It’s a trend borne out in the Love Island Villa where you can clearly see that no one is spending much on clothes. In fact judging by the tightness of the denim on the show, the poor male contestants have been prudently managing their purse strings and outgrew their wardrobes years ago.

For a more optimistic example, look at the latest holiday booking data from GfK Ascent for the period up to May 2017. Passenger numbers for the current Summer season are around 5% ahead of this time last year and spending has increased by a whopping 10%. These trends are also consistent with the Government’s Passenger Survey up to the end of April 2017 and confirm that Travel is still capturing more than its fair share of leisure outlay.

Once again, it’s a theme predicted by Love Island, where somewhere around a thousand contestants have been flown out for this years show. (Most were sent packing within 24 hours which is a real testament to Mallorca’s flight connectivity.)

There is however, a dark economic cloud hovering on the horizon of that blue sky. The latest inflation figures show life in the UK is getting about 3% more expensive each year whilst wages are only growing by 2%. With less money coming in, it appears that all the extra holiday spending is going on credit. Great news for short term happiness but it could create havoc down the road.

In fact consumer debt is now at record levels and the abundance of cheap loans and 0% credit card deals have certainly got the Bank of England spooked. Plans are already underway to regulate irresponsible lending more tightly lest it froth over into another sub-prime debt crisis.

To put it another way, consumers have been enhancing their self esteem by spending heavily on plastic. Once again, that’s just like the contestants on Love Island.

The rumours of celebrity A listers and their outrageous dressing room requirements are legendary. As the urban myths go, Mariah won’t turn up unless a flock of newly hatched butterflies are there to greet her, while Madonna insists on a brand new toilet seat at every show she plays. The other day I came across a story about some unlikely divas: the American Hard Rock band, Van Halen and their “Clause 126”.

The story goes, that the contract terms with each of the stadium arenas that Van Halen toured would contain a strict clause. The band’s dressing room must have a bowl of chocolate M&Ms with all the brown ones taken out. Any venue breaking this rule would risk the concert being forfeited and the band being paid in full.

At first I assumed it was just another insane demand from celebrity egomaniacs who’d lost all sense of perspective but as it turns out, I couldn’t have been more wrong. This particular request was a clever risk management tactic.

Back in the day, Van Halen were one of the first stadium rock bands of their kind. They were early pioneers in creating complex stage designs and spectacular pyrotechnics. When they went out on their mammoth world tours, 9 large lorries would travel ahead of them carrying their stage and lighting equipment. Ensuring the production could go ahead safely and on time required a major logistical effort, a huge workforce, precision planning and attention to detail. The contractual terms with the arenas were hundreds of pages long, specifying all manner of important requirements from the door width needed to get the equipment in, to the density of the concrete needed to support the stage girders. If any of the arenas got the technicalities wrong the consequences could have been catastrophic, ranging from costly delays to serious casualties.

In order to test the arena management’s attention to detail, singer David Lee Roth, would insist on “Clause 126: no brown M&Ms” being buried in the back of the contract. On arrival at a new arena, he would march straight to the dressing room. At the sight of a brown M&M, he would insist on a full detailed safety check of the entire production, and if it wasn’t satisfactory they would cancel the show.

This might well be a tactic that travel companies could learn from. The current inquest into the Sousse tragedy has once again highlighted the long chain of liability that tour operators take on when delivering a holiday. The new Package Travel Directive which comes into force in 2018 will make many more sellers of travel contractually liable for the actions of their suppliers. A “Clause 126” might be a good way of ensuring those suppliers pay attention to the important details.

What is the new ATOL Financial Test?

The new Financial Test comprises a weighted score based on a series of 7 financial ratios:

the first 4 apply to Small Business ATOL holders (ie those carrying less than 500 ATOL passengers and £1m ATOL turnover annually).

all 7 apply to Standard ATOL holders carrying up to £20m turnover annually.

Companies with ATOL turnover greater than £20m are still subject to a separate, individual assessment and the ratios do not apply to them.

The financial ratios are:

ATOL applicants will receive a binary pass or fail result. For those that fail, they will be advised on the required cash injection to cure the position and pass the Financial Test.

While the CAA have released which financial ratios make up the Financial Test, they have not released any detailed guidance on what each individual ratio needs to meet to “pass”.

This creates an obvious problem when trying to make key business decisions. If you dont know what ratios are required to satisfy the regulator, how do you know for example:

how much dividend can be paid?

what can be spent on capex or marketing?

what is “free cash”?

One way around this is to use the ATOL Self Assessment Tool (ASAT) which allows you to submit draft accounts and receive an indication of the CAA’s assessment. You can submit multiple times enabling you to iterate when calculating dividends. However the results aren’t always instant. Nor are they binding until you submit your final accounts.

Some guidance courtesy of TTC

In an effort to provide some further guidance, we analysed the data from 70 of our clients who renewed their ATOLs in September 2016 and we learned the following:

What it means for Small Business ATOL Holders

If you’re a Small Business ATOL (SBA) holder, its likely this will be the first time you have had to submit financial information. Our analysis of our SBA clients who renewed in September 2016 showed the following average scores:

a current ratio of greater than 1 and a leverage ratio of less than 1 were the leading indicators of passing the Financial Test;

Many businesses were being financially assessed for the first time and were asked for cash injections or security bonding. In some cases, these were material amounts.

2. What it means for Standard ATOL holders with ATOL turnover < £20m

For Standard ATOLs our data indicated the following results:

Profitability ratio and cash ratio were leading indicators of satisfying the CAA;

Some operators did not pass the Financial Test as an SBA but managed to pass as a standard!

Tips for a smooth renewal

Here are our top tips to ensure your renewal goes as smoothly as possible.

Make sure you have appointed an ARA

The CAA introduced the ATOL Reporting Accountant scheme in 2016 and will only accept reporting from registered ARAs so make sure your accountant is on the ARA register. In the previous renewal, many ATOL holders left it last minute to appoint an ARA meaning they either didn’t get their ATOL renewed on time, or they paid a hefty fee for a new accountant to step in at short notice.

2. Use the ASAT

The CAA has introduced the ATOL Self Assessment Tool (ASAT) which you can use to get an an initial indication on how the CAA are likely to assess your accounts, and will give an indication of any likely cash injections required.

Pro tip: you’ll get a much quicker response from the CAA if you press the submit button rather than email a pdf of your ASAT.

3. Get in early

Invitations to renew your ATOL normally go out 4 months before the deadline. Ensure your accounts are ready on time and your ATOL application has been submitted as quickly as possible to ensure your renewal is processed. If you’re late to the party you run a real risk of not having your ATOL renewed which means you wont be able to sell air holidays.

The renewal fee also increases if you submit later than 2 months before the deadline.

Reclining on the pop-up chaise in my shell suit, savouring a Tizer on the rocks, watching the incomparable Jet from Gladiators pole-axe Contenders. In the next room my Mam would Shake’n’Vac the remnants of my Findus Crispy Pancakes to the blissed out beats of Right Said Fred. Good times.

Like I said. A very different affair. Though I was wearing a shell suit.

Much like my wardrobe, The Package Travel Regulations have been in need of an upgrade ever since 1992. In fact, here is a timeline showing how long the process has been going.

In November 2015, the European Parliament finally signed off the new Package Travel Directive text (PTD 2015) – a mere 8 years after kicking off the reform process.

Here is a picture of an actual glacier so you can compare the two.

After taking so long to get to the point, we now have a race on our hands.

The consultation process setting out how PTD 2015 will work in the UK has been beset by Brexit shaped delays. Given these new laws will apply to holidays departing after July 2018 and that many companies will start selling their Summer 2018 programme in the next 6 months, it doesn’t leave much time.

Theres still a huge amount to do but this is an important next step. The consultation runs to 24th November 2016 so make sure you have your say here.

In the meantime, here are my 8 key takeaways:

Brexit shmexit

First lets clear up one common question. Does the UK even need to push ahead with implementing another European Directive given the results of the referendum on EU membership?

On this point, the DfT is emphatic. The UK will still be a full member of the EU in July 2018 when the new rules come into force so its full steam ahead to implement PTD 2015 in full.

Of course, there’s still a big question mark over what happens after the UK has left the EU, but then then the travel sector is hardly unique there….

Place of establishment

One of PTD 2015’s most controversial cornerstones is the move to a Place of Establishment basis. In a nutshell, businesses will be regulated in the EU member state where they are established rather than where they sell holidays.

There are many practical questions still to be answered on this, like how will UK citizens be protected from another Lowcostholidays situation, not to mention how the UK travel sector will react if the healthy Air Travel Trust Fund balance is spent refunding and repatriating non-UK citizens.

On the positive side, new legislation will enable ATOL holders to protect their EU sales under the ATOL scheme, likely through the usual payment of ATOL Protection Contributions. This will make it much easier for UK companies to sell into the EU without the need to establish companies and apply for licences in those territories.

Flight-Plus is dead

Flight-Plus was only introduced in 2012 and has remained fairly misunderstood by consumers and large sections of the trade ever since.

The wider definition of package in PTD 2015 means that pretty much all Flight-Plus arrangements will become packages. The DfT has confirmed the Flight-Plus concept will be consigned to the history books. Thanks for coming. Its been an emotional ride. Don’t let the door hit you on the way out.

Flight-Only

Right now, the regulation of Flight-Only is a mess.

By way of recap, if a customer buys a Flight-Only direct from an airline, its exempt from the ATOL scheme. Buy the same flight via an agent and unless you get the ticket “immediately” you’ll get full ATOL protection but that agent will have to underwrite the cost of the airline failing.

To add to the confusion, the major vertically integrated tour operators (ie. those who own their own aircraft) regularly change their policy on Flight-Onlys to include or exclude them from ATOL protection to suit their wider business needs.

Most recently, Monarch reverted to selling their Flight-Onlys direct from the airline in October 2016 in order to claim the exemption from the ATOL scheme. Lest we forget, It was only 2014 that it brought them on to the ATOL scheme by selling them through First Aviation, their in-house agent, in order to reduce their Merchant Acquirer’s liabilities. Does the customer have a clue about any of this? Id say its unlikely.

This is exclusively a UK problem too. No other EU member states require any sort of protection for Flight-Onlys.

There are only really 2 ways to tidy this up and make it clearer. Regulating all Flight-Onlys including the ones sold direct by airlines is off the table so the only viable option is to take all scheduled Flight-Onlys out of the ATOL scheme altogether. The DfT are seeking views on this option.

Linked Travel Arrangements

We might well solve the over-complicated issues of Flight-Plus and Flight-Only, but we look like creating another in their place. The regulatory hospital pass from the EU known as Linked Travel Arrangements (LTAs).

Trying to define LTAs is an entire blog post in itself. Suffice it to say, the concept was mainly designed to protect sales where customers click through from an airline website onto an affiliate hotel partner. LTA arrangers only have to protect pipeline monies they are holding so customers purchasing this type of arrangement would have a significantly lower level of financial protection than when buying a full package.

Basically, LTAs look like an unworkable mess which explains why the DfT is wisely looking to sidestep them altogether. The DfT consultation suggests finding “market solutions” to cover LTAs and hints at a preference for keeping them well away from the ATOL scheme. Its easy to see why. Bringing LTAs into ATOL would confuse the hell out of customers and severely weaken the ATOL protection message.

Agent for the consumer

Agent for Consumer (A4C) is a legal switcheroo in the small print of terms and conditions whereby instead of an OTA acting as the airline’s agent in selling the flight to a customer, they act as the customer’s agent in buying the flight from the airline.

Its actually fairly common practice amongst OTAs as it helps avoid accusations they are organising packages and it wards off belligerent, agent-unfriendly Low Cost Carriers like Ryanair. It also nets OTAs a tidy 50% discount on their ATOL Protection Contribution (APC) for A4C sales.

If you dont understand A4C, then you can be sure your customers dont. One of many reasons why PTD 2015 has outlawed it completely.

7. Business Travel

Its long been a source of frustration for Travel Management Companies (TMCs) that they have to comply with ATOL protection in the first place. PTD 2015 will officially take TMCs out of the regulations, provided they operate under a framework contract with their corporate clients.

8. Other odds and sods

As a result of these planned changes, there’ll be tweaks to all key documents including Terms and Conditions, ATOL Certificates, agency agreements, confirmation invoices etc etc.

In early 2005, I set off backpacking for 5 months in South America. I’m a stickler for detailed planning, so nothing was left to chance. I’d meticulously mapped out my route following the “Panamericana” – the stereotypical beaten track running south down the Peruvian coast.

Barely two weeks in to the journey something strange happened at a bus station. I don’t know if it was the Hemingway novel I’d been reading, or the unhealthy amount of Pisco Sour I was imbibing, but I was overcome by a strong urge for adventure. In a moment of wild abandon, I took a leap of faith, threw my map in the bin and jumped on a clapped-out old minibus heading towards the Amazon jungle. As the bus pulled away, my heart was racing, and an exhilarating feeling washed over me. I was free and in total control.

That feeling lasted for about 1 day.

During what was meant to be a quick overnight interchange in a remote, one-hotel-town, there was a biblical downpour, washing away the roads in both directions, making them impassable.

I spent the next 8 days counting the cost of my recklessness. What had I been thinking? I couldn’t go forwards. I couldn’t go backwards. I was trapped. Worse, I was trapped in a small cockroach infested hotel run by an unhinged taxidermy enthusiast who clearly belonged on some sort of register.

I’m reminded of this incident whenever I read about our government’s Brexit strategy.

I haven’t worked out who is who in this metaphor. I’m certainly not implying the British electorate were off their face when they voted leave, any more than I’m saying Nigel Farage is Ernest Hemingway. Nevertheless, my decision to head into the unknown without a map seems sadly analogous to the current shambles. Also, the presence of an untrustworthy bus seems to work on a number of levels.

To be fair, since the referendum result in June, there have been plenty of positive signs for the travel industry to cling on to. Most recently, the September GfK Leisure Travel Monitor showed a strong finish to bookings for the Summer 2016 season, which should end around 4% ahead of last year. Bookings for Winter 2016/17 also look a very healthy 17% up and it seems there is lots of early demand for Summer 2017 too. Its tempting to infer that consumers have “shrugged off Brexit”. There is one very good reason for that, though. It hasn’t actually happened yet.

A September Private Eye article sarcastically summed it up: “Amazingly, the economy is continuing as if we were still at present a member of the European Union and able to trade tariff-free across the 27 member states” and then in slightly more agricultural terms: “the sh*t has not hit the fan yet as Theresa May tries to avoid turning on the fan for as long as possible”.

At the start of October, as May got tough and talk of Article 50 got serious, Hard Brexit became a thing and Sterling fell through the floor. The fan has now been turned on, and its massive, like the one in the Crystal Maze. Only its not sh*t thats hitting it. Its Marmite.

Back in 2005, I did manage to “shrug off” being trapped in a Peruvian episode of Twin Peaks. My South American adventure finished 5 months later in Rio de Janeiro, lying on a sunny Ipanema beach, drinking coconuts.

I have a confession to make. Before July 2016, I had never seen the film Mary Poppins. The good news is, my children are on holiday from school so we’ve now put that right. Eight times.

I can’t honestly say Ive seen too many 50 year old children’s films, so I dont have a frame of reference, but Poppins seems to deal with some unexpectedly weighty themes. The British class system, the struggle for universal suffrage, chimney sweepers rights. Its also essential viewing for the Bank of England Monetary Policy Committee (MPC), who right now are grappling with the central question: How do you persuade people to spend more of their Tuppences on frivolous leisure activities like feeding the birds and less on investing it prudently in a bank so that it blooms?

Savings certainly did bloom back when the film was originally released. In 1964 the Base Rate was a generous 7% and it remained high throughout the next 30 years peaking at a frankly ridiculous 17% in the late 1970s. Its been a different story more recently, though. Rates have been held at 0.5% since the financial crisis in 2009 and there was news this week that the MPC were planning to cut it to a new record low of 0.25%.

There is now the genuine prospect of negative interest rates in the UK, where banks would charge you for holding your money in your account. It seems an inconceivable concept but has become quite common in Europe as governments try to shock some life into their flagging economies.

Tour operators will feel the pinch more than most. Their cash cycle, whereby customers pay well in advance of travel, and suppliers are paid close to departure, mean cash balances are proportionally higher relative to other sectors. A tour operator ’s main asset is usually the client money it is holding and in fact there were some operators who only ever made an annual profit as a result of the interest return on their client’s money. Their holidays were almost “loss leaders” in the same way Tesco’s might discount petrol to get people into their store. Those days are thankfully long gone and the sector has had to adjust to life without interest as an income stream. Nevertheless, negative rates would be an additional cost that the sector could do without.

On the plus side a reduction in borrowing costs will be very welcome news for those with significant loans outstanding, such as those purchased through leveraged Private Equity backed buy outs in the last 18 months. Sadly the day when banks pay you to borrow from them is unlikely to materialise though. Typically, loan agreements will have an interest rate floor meaning they can never go below zero.

The MPC are of course trying to make saving money as unattractive as possible in the hope of encouraging us to spend more. If it works, the travel sector could well see a much needed bounce in bookings just in time for the tail end of the lates market. However there is a big risk that negative interest rates may have the opposite effect. Spending could actually fall if panic ensues and people rush to horde their cash under their mattresses. Large scale withdrawals could even trigger a run on banks.

News broke late on Friday(15th July)that the Lowcost Group had ceased trading and called in administrators.

Though the recent Brexit vote, and resulting financial turmoil was blamed for the collapse, in truth the group had been experiencing financial challenges long before June. Pressures in core holiday markets like Turkey, rising costs of pay per click Google advertising and a notoriously price sensitive customer base meant that the Lowcost Group was operating on very low profit margins with little reserves to cushion the impact of a shock.
Warren Buffet used to say that when the tide goes out, you can see whose been swimming naked. Well Brexit was the tide.
Lowcost Holidays had a very public falling out with the CAA back in 2013 and took advantage of a controversial loop hole in the ATOL regulations that allows companies established in other EEC member states to sell into the UK without the need for ATOL protection.
Lowcost Holidays relocated its head office to Mallorca and was regulated by the government of the Balearic Islands, who offered a significantly cheaper way of complying with European Package Travel regulations. The CAA warned customers back in 2013 to be cautious about booking with the Lowcost Holidays. Their move was widely condemned by the travel trade at the time and has formed the basis for many a discussion as other businesses considered similar moves.
We understand that there are currently 27,000 customers overseas. Whilst repatriation shouldn’t be an issue (most flights will have been paid in full) many customers will be asked to pay again for their accommodation in resort.
For the 110,000 poor customers who have not yet departed, their summer holiday plans lie in tatters and the Balearic scheme is unlikely to be able to cope with the volume of refund claims.
There are wider complications too. Many travel businesses sold flights together with product, sourced from Lowcost Beds as a B2B wholesale supplier.
Under Flight Plus rules, they are now faced with a stark choices. They must either find their customers an alternative bed with little chance of reclaiming any already paid. This could prove very expensive given well publicised capacity shortages in Spain and other “safe” destinations. Alternatively they will have to offer a full refund of the hotel as well as the flights and car hire making this equally costly an option.
While the CAA will have no involvement in helping consumers of Lowcost Holidays, they will be watching closely with fingers crossed that the failure of Lowcost Beds doesn’t cause a domino effect of other travel business failures.